S&P 500: First Three-Day Slump to Start the Year Since 2005

By Ben Levisohn

What’s it going to take to get the S&P 500 to rise in 2014? Better performance from stocks like Microsoft (MSFT), Berkshire Hathaway (BRK.B), Celgene (CELG), AbbVie (ABBV) and Plum Creeek Timber (PCL), for starters.

Bloomberg

The S&P 500 dropped 0.3% to 1,826.77 today–its third consecutive decline this year–while the Dow Jones Industrial Average dropped 0.3% to 16,425.10.

The last time the S&P 500 fell three days to start off the year was in 2005, when it lost 2.3% over that period. The benchmark finished up 3% that year.

Feeling nostalgic for last year’s gains? Goldman Sachs’ David Kostin and team note that it wasn’t just the price of the S&P 500 that closed at a record high last year:

The S&P 500 closed 2013 at 1848 setting a new record on the final day of trading for a total return of 32.4%. Many other records were set or maintained in the US equity market over the course of last year including Sharpe ratio, margins, earnings, inflows, dividends, and cash balances…After a year that broke so many records, where should investors look for growth in 2014? We recommend focusing on how firms will spend their record cash balances as economic uncertainty decreases. We forecast buybacks, cash M&A, dividends, and capex will all grow at a faster rate in 2014 than they did in 2013.

And while Goldman Sachs sees the S&P 500 closing up just 3% in 2014, RBC Capital Market’s Jonathan Golub and Manish Bangard boosted their year-end forecast for the S&P 500 to 2,075 today. They explain why:

On October 2, we initiated our 2014 price target at 1,950 on EPS of $119 and $130 for 2014 an 2015. At that time, we made the case that the market would move to toward a fair value P/E of 16x over the next several years. We reiterate our EPS and valuation forecasts. However, the pace of re-rating is progressing faster than initially projected, and for this reason, we are adjusting our target. Further, we believe a slower, extended economic recovery provides a supportive backdrop for stocks.

Strategas Research Partners’ Jason DeSena Trennert sees active management making a comeback in 2014. He writes:

One of the great ironies of the period from 1982 to 1999 was that while it was a great time to be in the business of active management, it was an awfully difficult period in which one could add alpha without constructing extraordinarily concentrated and, by extensions, riskier portfolios. With the Fed likely to attempt to excuse itself from a table that was host to a level of overabundance that would make Paul Prudhomme weep, it seems likely that the talented active manager could add greater value by simply picking stocks and a renewed emphasis on what drives top-line growth.

But don’t just expect to buy a mutual fund and outperform. In a report today, Morgan Stanley’s Adam Parker and team recommend fund managers run more concentrated portfolios:

The rise in company-specific risk we saw during 2013 could be a positive harbinger for investors as we enter 2014. After falling to extreme lows during and after the financial crisis, idiosyncratic risk is currently at 5-year highs, even if still below longer-term averages. As we highlighted several times in our research over the last year, historically, periods of rising company-specific risk were followed by better alpha generation from equity market neutral and long-short hedge funds.

However, dispersions of returns and price to forward earnings are pretty low. In fact, dispersion of price-to-forward earnings is currently at the 6th percentile (i.e., lowest decile) versus its history and at a low since the financial crisis. This tends to mean long-short opportunities aren’t as apparent right now, and a widening of dispersion is ultimately likely. What do we do with this potentially contradictory information? We think the right investment approach is to run a more concentrated portfolio.

About Stocks To Watch

Earnings reports, corporate strategies and analyst insights are all part of what moves stocks, and they’re all covered by the Stocks to Watch blog. We also look at macro issues, investor sentiments and hidden trends that are affecting the market. Stocks to Watch gives you the full picture of the U.S. stock markets, all day long.

The blog is written by Ben Levisohn, a former stock trader who has covered financial markets for the Wall Street Journal, Bloomberg and BusinessWeek.